16. Among the government’s uses of funds are;
a. government purchases. c. real revenue from printing money.
b. tax revenue. d. all of the above.

17. In the market clearing model without government borrowing, the net effect of government on households is an increase in funds of:
a. transfer payments times taxes. c. taxes less transfer payments.
b. transfer payments plus taxes. d. transfer payments less taxes.

18. If a household’s transfer payments less taxes is positive, then the government:
a. is a net source of funds for that household. c. is a net drain on that household.
b. is a net use of fund of funds for that household. d. does not affect that household’s budget constraint.

19. If a household’s transfer payments less taxes is negative, then the government:
a. is a net source of funds for that household. c. is a net subsidizer of that household.
b. is a net use of fund of funds for that household. d. does not affect that household’s budget constraint.

20. According to the market clearing model a permanent increase in government purchases causes:
a. a decrease in consumption. c. an increases in real GDP.
b. an increases in the real interest rate. d. all of the above.

21. According to the market clearing model a permanent increase in government purchases leads to:
a. an increase in capital utilization. c. an increase in the demand for capital services.
b. a decrease in the supply of capita services. d. no change in the real rate of interest.

22. According to the market clearing model a permanent increase in government purchases causes an increase in:
a. real GDP. c. the real wage rate.
b. the real interest rate. d. none of the above.

23. In the market clearing model the intertemporal substitution effect from a permanent increase in government purchases:
a. works through real interest rate changes. c. works through real interest rate and real wage changes.
b. works through real wage changes. d. does not exist because the real interest rate and real wage rated do not change.

24. In the market clearing model a permanent decrease in government purchase will:
a. increase consumption. c. increase the real wage rate.
b. increase the real interest rate. d. all of the above.

25. In the market clearing model a permanent increase in government purchases does not increase the real wage because:
a. labor supply and labor demand increase about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

26. In the market clearing model a permanent increase in government purchases does not increase the real interest rate because:
a. the supply of capital services and demand for capital services increase about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

27. According to the market clearing model, a one unit permanent increase in government purchases causes:
a. GDP to rise about one unit. c. gross investment to fall about one unit.
b. consumption to fall about one unit. d. all of the above.

28. According to the market clearing model a one unit permanent increase in government purchases causes:
a. no change in GDP. c. no change in gross investment.
b. consumption to fall about one unit. d. all of the above.

29. US data since the end of the Korean war shows that permanent changes in government purchases are:
a. acyclical as the model predicts. c. acyclical as opposed to the model that predicts they will be procyclical.
b. procyclical as the model predicts. d. countercyclical as opposed to the model that predicts they will be acyclical.

30. Since the end of the Korean war, US permanent government spending has:
a. increased as GDP has increased. c. had little relationship to fluctuations in real GDP.
b. decreased as GDP has increased. d. decreased when GDP decreased.

31. The model predicts that a temporary increase in government purchases causes:
a. an increase in consumption. c. a reduction in gross investment.
b. a reduction in real GDP. d. all of the above.

32. The model predicts that a temporary increase in government expenditures will lead to:
a. a decrease in consumption. c. a decrease in GDP.
b. an increase in investment. d. none of the above.

33. People might work more during a war time temporary increase in government purchases because of:
a. patriotism. c. increased investment the model predicts.
b. the increase in the MPL as the model predicts. d. all of the above.

34. People might work more during a war time temporary increase in government purchases because of:
a. a military draft or voluntary enlistment takes away some primary household earners and to maintain consumption as the model predicts, those households may have other members work who did not previously. c. increased investment leading to hire capital stocks that increase the demand for labor as the model predicts.
b. the increase in the MPL leading to an increase in the demand for labor and increased capital utilization as the model predicts. d. all of the above.

35. The real wage increase in the data during war time might be overstated as:
a. price controls lead to understating the price level. c. because capital utilization falls in war time.
b. labor demand is so high in war time. d. all of the above.

38. The model predicts that a temporary decrease in government purchases causes:
a. an increase in consumption. c. an increase in gross investment.
b. a reduction in real GDP. d. all of the above.

39. According to the market clearing model, a one unit temporary decrease in government purchases causes:
a. no change in GDP. c. no change in the interest rate.
b. investment to rise about one unit. d. all of the above.

40. According to the market clearing model, a one unit temporary decrease in government purchases causes:
a. a one unit decrease in GDP. c. consumption to rise about one unit.
b. gross investment to rise about one unit. d. all of the above.

41. The model predicts that a temporary decrease in government expenditures will lead to:
a. an increase in real wages. c. a decrease in GDP.
b. a decrease in the real interest rate. d. none of the above.

42. The model predicts that a temporary decrease in government purchases causes:
a. an increase in consumption. c. an increase in gross investment.
b. a reduction in real GDP. d. all of the above.

43. The model predicts a permanent decrease in government purchases causes:
a. an increase consumption. c. an increases real GDP.
b. an increases the real interest rate. d. all of the above.

44. The model predicts a permanent decrease in government purchases leads to:
a. an increase in capital utilization. c. an increase in the demand for capital services.
b. a decrease in the supply of capita services. d. no change in the real rate of interest.

45. According to the model a permanent decrease in government purchases does not increase the real wage according to the market clearing model because:
a. labor supply and labor demand decrease about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

46. According to the model a permanent decrease in government purchases does not decrease the real interest rate according to the market clearing model because:
a. the supply of capital services and demand for capital services decrease about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

47. A temporary decrease in government purchases does not increase the real wage according to the market clearing model because:
a. labor supply and labor demand decrease about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

48. A temporary decrease in government purchases does not decrease the real interest rate according to the market clearing model because:
a. the supply of capital services and demand for capital services decrease about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

49. A temporary increase in government purchases does not increase the real wage according to the market clearing model because:
a. labor supply and labor demand increase about the same amount. c. labor demand is downward sloping.
b. labor supply is fixed. d. neither labor demand nor labor supply shift due to the permanent increase in government purchases.

50. A temporary increase in government purchases does not increase the real interest rate according to the market clearing model because:
a. the supply of capital services and demand for capital services increase about the same amount. c. the demand for capital services is downward sloping.
b. neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases. d. the supply of capital services is upward sloping.

51. Goernment expediture as a ratio to GDP since the 1980s has
a. stabilized at about 1/3. c. grown from about 1/3 to 1/2.
b. grown from about 1/10 to 1/5. d. declined from about 1/3 to 1/5.

52. Data across more than 50 countries shows that the U.S. ratio of government expediture to GDP is
a. much higher than the median ratio. c. slightly below the median ratio.
b. one of the two highest ratios. d. one of the two lowest ratios.

53. At the federal level, the largest expansions in transfer payments have been from increases in
a. unemployment insurance c. welfare.
b. Social Security. d. tax rebates.

54. U.S. data show that the ratio of Social Security, Medicare and state and local Medicaid payments to GDP is
a. less than 1%. c. about 50%.
b. more than 98%. d. about 10%.

55. When the Barro model assumes lump-sum taxes, this means
a. real taxes are independent of a household’s income. c. nominal taxes depend negatively on a household’s consumption.
b. nominal taxes depend positively on a household’s income. d. there is no tax on inheritances.

57. Real disposable income for a household equals
a. the real return on capital services. c. real income available after taxes.
b. the nominal wage rate. d. the real return on capital services after taxes.

58. If a household’s real taxes increase by one unit, then
a. real government transfers to the household decreae by one unit. c. the real return on capital services falls by one unit.
b. real government transfers to the househould increase by one unit. d. real disposable income falls by one unit.

59. Adding government to the Barro model affects the household budget constraint by
a. adding the present value of real transfers net of real taxes as a source of funds. c. adding the present value of real transfers plus real taxes as a use of funds.
b. adding and subtracting the present value of real transfers net of real taxes as a source of funds, for no net effect. d. subtracting the present value of real transfers net of real taxes as a use of funds.

60. A permanent increase in government purchases will
a. shift the demand for capital services outward. c. shift the supply of capital services inward.
b. not shift the demand or supply of capital services. d. shift the supply of capital services outward.

61. A permanent increase in government purchases will
a. shift the demand curve for labor invward. c. not shift the supply or demand curves for labor.
b. shift the supply curve for labor outward.. d. shift the demand curve for labor outward.

62. One empirical prediction from the model which includes government purchases is that
a. permanent changes in real government purchases increase real GDP. c. permanent changes in nominal government purchases increase nominal GDP.
b. permanent changes in real government purchases decrease real GDP. d. permanent changes in real government purchases have little impact on real GDP.

63. One difference between a permanent and temporary increase in government purchases is that with a temporary increase,
a. expected real disposable income in future years is unchanged. c. the expected real wage rate in future years is higher.
b. expected real disposable income in future years is higher. d. the expected real wage rate in future years is lower.

64. A temporary increase in government purchases, unlike a permanent increase,
a. comes mostly at the expense of a loss of transfer payments. c. increases the real wage rate in future years..
b. comes mostly at the expense of a loss in gross investment. d. comes mostly at the expense of a lower real interest rate.

65. The data on temporary increases in government purchases during wartime
a. do not support the prediction that gross investment would rise. c. do not support the prediction that GDP would be unchanged.
b. do not support the prediction that consumption would rise. d. do support the prediction that GDP would be unchanged.

SHORT ANSWER

1. What is the government’s budget constraint without government borrowing and what does it show us?

2. How does government without borrowing affect the household’s budget constraint?

3. What are the effects of a permanent increase in government purchases in the market clearing model?

4. What are the effects of a temporary increase in government purchases?

5. What has been the US experience in war time temporary increase in government purchases and how do they conform with the predictions of the model?

Chapter 13

TRUE/FALSE

1. The marginal tax rate is the change in taxes when taxable income change one unit.

2. The term (1 – w) is the faction of labor income the worker gets to keep.

3. An increase in the marginal tax on labor income, increases the supply of labor.

4. An increase in the marginal tax on labor income, decreases the demand for capital services.

5. A decrease in the marginal tax on asset income, reduces investment short run and the capital stock and GDP in the long run.

6. An increase in the marginal tax rate on labor income reduces overall market activity, as gauged by GDP.

7. The largest sources of tax revenue for the U.S. federal government include the individual income tax and social-insurance contributions.

8. The largest source of tax revenue for the U.S. federal government is the corporate-profit tax.

9. U.S. data show that state and local government revenues currently far exceed federal government revenues.

10. A graduated income-tax rate has a marginal tax rate which equals the average tax rate.

MULTIPLE CHOICE

1. The US Federal government gains revenue from:
a. individual income taxes. c. excise taxes.
b. social insurance taxes. d. all of the above.

2. The US Federal government gains revenue from:
a. property taxes. c. UN grants.
b. social insurance taxes. d. all of the above.

3. The US Federal government gains revenue from:
a. property taxes. c. individual income taxes.
b. sales taxes. d. all of the above.

4. The US Federal government gains revenue from:
a. revenue from money creation. c. sales taxes.
b. social insurance taxes. d. all of the above.

6. The US state and local governments gains revenue from:
a. property taxes. c. sales taxes.
b. income taxes. d. all of the above.

7. The US state and local governments gains revenue from:
a. property taxes. c. sales taxes.
b. income taxes. d. all of the above.

8. The US state and local governments gains revenue from:
a. property taxes. c. revenue from money creation.
b. customs. d. all of the above.

9. The US state and local governments gains revenue from:
a. revenue from money creation. c. sales taxes.
b. customs. d. all of the above.

10. The US state and local governments gains revenue from:
a. customs. c. revenue from money creation.
b. federal grants. d. all of the above.

11. The US state and local governments gains revenue from:
a. revenue from money creation. c. income taxes.
b. customs. d. all of the above.

12. The marginal income tax rate is:
a. taxes divided by income. c. income divide by taxes.
b. the change in taxes when income changes one dollar. d. the change in income when taxes change one dollar.

13. The average income tax rate is:
a. income taxes divided by income. c. income divide by income taxes.
b. the change in income taxes when income changes one dollar. d. the change in income when income taxes change one dollar.

14. The average marginal income tax rate is:
a. the marginal tax rate of the average household. c. the change in income taxes divided by income.
b. the average tax rate of the marginal household. d. all of the above.

17. One less the marginal tax on wages, (1 – w) is:
a. the fraction of wage income paid in taxes. c. the fraction of income the government receives.
b. the fraction of wage income the worker gets to keep. d. the average marginal tax rate.

19. If government purchases are constant, then an increase in the marginal income tax rate, w, leads to:
a. a positive income effect. c. no income effect.
b. a negative income effect. d. a marginal income effect.

20. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. lowered some other lower marginal rate wage tax like the social security payroll tax. c. raised some income tax deductions.
b. the increased revenue due to the higher marginal tax rate is all used for real transfers. d. all of the above.

21. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. lowered some other lower marginal rate wage tax like the social security payroll tax. c. reduced some income tax deductions.
b. reduced real transfers. d. all of the above.

22. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. raised some other lower marginal rate wage tax. c. reduced some income tax deductions.
b. used all the increased revenue due to the higher marginal tax rate for real transfers. d. all of the above.

23. If the marginal tax rate on income, w, changes but government purchases don’t then the government could have:
a. raised some other lower marginal rate wage tax. c. raised some income tax deductions.
b. lowered real transfers. d. all of the above.

29. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will rise compared to future consumption. c. the after tax real interest rate falls.
b. current investment will fall. d. all of the above.

30. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will rise compared to future consumption. c. the after tax real interest rate rises.
b. current investment will rise. d. all of the above.

31. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will fall compared to future consumption. c. the after tax real interest rate rises.
b. current investment will fall. d. all of the above.

32. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a. household current consumption will fall compared to future consumption. c. the after tax real interest rate falls.
b. current investment will rise. d. all of the above.

33. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. increases the stock of capital and real GDP. c. decreases the stock of capital and real GDP.
b. increases the stock of capital and decreases real GDP. d. decreases the stock of capital and increases real GDP.

34. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. decreases GDP. c. lowers consumption.
b. decrease the capital stock. d. all of the above.

35. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. increases GDP. c. raises consumption.
b. decrease the capital stock. d. all of the above.

36. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a. decreases GDP. c. raises consumption.
b. increase the capital stock. d. all of the above.

37. With an increase in government purchases financed by an increase in the marginal tax rate on labor income, the change in labor supply depends on whether the:
a. negative substitution effect is bigger than the positive income effect. c. positive substitution effect is bigger than the negative income effect.
b. negative substitution effect is bigger than the negative income effect. d. positive substitution effect is bigger than the positive income effect.

38. An increase in government purchases financed by an increase in the marginal tax rate on labor income, increases the quantity of labor supplied, if the:
a. negative substitution effect is bigger than the positive income effect. c. positive substitution effect is bigger than the negative income effect.
b. negative substitution effect is smaller than the positive income effect. d. positive substitution effect is smaller than the negative income effect.

39. An increase in government purchases financed by an increase in the marginal tax rate on labor income, decreases the quantity of labor supplied, if the:
a. negative substitution effect is bigger than the positive income effect. c. positive substitution effect is bigger than the negative income effect.
b. negative substitution effect is smaller than the positive income effect. d. positive substitution effect is smaller than the negative income effect.

40. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward a decrease in labor supply. c. the substitution effect would be towards an increase in labor supply.
b. the overall effect on labor supply is uncertain. d. all of the above.

41. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward a decrease in labor supply. c. the substitution effect would be towards an decrease in labor supply.
b. the overall effect on labor supply is negative. d. all of the above.

42. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward an increase in labor supply. c. the substitution effect would be towards an increase in labor supply.
b. the overall effect on labor supply is positive. d. all of the above.

43. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor income, then:
a. the income effect would be toward an increase in labor supply. c. the substitution effect would be towards a decrease in labor supply.
b. the overall effect on labor supply is uncertain. d. all of the above.

44. If the marginal tax on labor income, w, rises then the tax receipts of the government:
a. rise. c. stay the say.
b. fall. d. may rise, fall or stay the same.

45. If transfer payments are related to characteristics of households like income, then an increase in the marginal tax on labor income, w,:
a. will have smaller effects in the market clearing model. c. will have the same effects in the market clearing model.
b. will have stronger effects in the market clearing model. d. will have no effects in the market clearing model.

46. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. does not change the stock of capital c. does not change the market clearing rental price of capital.
b. does not change real GDP. d. all of the above.

47. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. does not change the stock of capital c. reduces the market clearing rental price of capital.
b. decreases real GDP. d. all of the above.

48. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. raises the stock of capital c. does not change the market clearing rental price of capital.
b. increases real GDP. d. all of the above.

49. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. raises the stock of capital c. reduces the market clearing rental price of capital.
b. does not change real GDP. d. all of the above.

50. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a. raises change the stock of capital c. increases gross investment.
b. increases real GDP. d. all of the above.

51. From 1929 to the present, total government revenue grew to be about
a. 30% of GDP. c. 10% of GDP.
b. 50% of GDP. d. 1% of GDP.

52. Before World War II, state and local government revenue comprised about
a. less than one-third of total government revenues. c. 10% of total government revenues.
b. more than half of total government revenues. d. 0% of total government revenues.

53. Since World War II, state and local government revenues have been a
a. growing share of total government revenues. c. shrinking share of total government revenues.
b. stable share of total government revenues. d. miniscule share of total government revenues.

54. Individual income taxes in the U.S.
a. began during the Revolution. c. affect only the richest 10% of people.
b. are an insignficant source of revenue. d. mostly began in 1913.

55. The major sources of federal government revenue, in descending order of their importance, are
a. individual income taxes, social-insurance contributions, and corporate profits taxes. c. payments from the Federal Reserve, corporate profits taxes, and individual income taxes.
b. social-insurance contributions, corporate profits taxes, and individual income taxes. d. corporate profits taxes, payments from the Federal Reserve, and individual income taxes.

56. The single largest source of federal government revenue from those listed below is
a. taxes on corporate profits. c. excise and customs taxes.
b. individual income taxes. d. payments from the Federal Reserve to the U.S. Treasury.

57. The U.S. federal income-tax structure is designed so that
a. all citizens pay a flat marginal tax rate. c. the marginal tax rate generally rises with income.
b. the average tax rate falls as income rises. d. all citizens pay a flat average tax rate.

58. Data on U.S individual income taxes shows that the income tax
a. is not graduated, because higher-income citizens pay a high share of the taxes. c. is flat, because higher-income citizens pay a low share of the taxes.
b. is flat, because higher-income citizens pay a high share of the taxes. d. is graduated, because higher-income citizens pay a high share of the taxes.

59. Data on U.S adjusted gross income show that the income tax is progressive because
a. high-income citizens pay a high share of taxes relative to the share of income they receive. c. low-income citizens pay a high share of taxes relative to the share of income they receive.
b. high-income citizens pay a low share of taxes relative to the share of income they receive. d. all citizens pay a high share of taxes relative to the share of income they receive.

60. Historical data on U.S. marginal taxes rates show, that on average, the marginal tax rate
a. fell during the Korean War in the 1950s to an all-time low. c. were at their highest in the pre-World War II era.
b. rose after World War II to a high of about 40% in 1981. d. none of the above.

61. The U.S. Social Security contribution or tax on individuals
a. is a graduated tax for incomes up to $94,200. c. is a flat tax for incomes up to $94,200.
b. is a graduated tax for all incomes, with no upper limit. d. is a progressive tax for all incomes up to $10,000.

62. The U.S. Social Security contribution or tax on individuals has a marginal tax rate which equals the average tax rate. This makes it
a. a progressive tax. c. an alternating tax.
b. a depreciating tax. d. a flat tax.

1. What are the effects of an increase in the marginal tax rate on labor income in the market clearing model?

2. What does (1 – w) tell us and what are the real after tax returns on assets and labor if income from them are taxed?

3. What are the short run effects of an increase in the marginal tax rate on assets income in the market clearing model?

4. What are the long run effects of an increase in the marginal tax rate on asset income in the market clearing model?

5. Under what conditions in the market clearing model will the quantity of labor supplied increase when government purchases are increased and financed by an increase in the marginal tax rate on labor income?

6. What are the major sources of revenue for the U.S. government, and which are most important today?

7. Explain the difference between a graduated-rate tax and a flat-rate tax.